4. IRIS Flashcards
NAIC Analyst team system
Financial examiners review IRIS & RBC & place company into 1 of 3 levels
A : YES require immediate action
B : NO require immediate action but potential adverse results
No attention needed


IRIS Ratio 1 (5)
formula
unusual range
unusual means?
GWP =?
if negative GWP then IRIS 1 = ?
- GWP/PHS
- Unusual>=900
- Unusual means surplus inadequate to absorb losses before reinsurance
- GWP = DWP + Reinsurance assumed from affiliates + reinsurance assumed from NONaffiliates
- If Negative GWP THEN IRIS 1 ratio = 0
IRIS Ratio 2
formula
unusual range
unusual means?
if negative GWP then IRIS 1 = ?
- NWP/PHS
- Unusual>=300
- Unusual means surplus inadequate to absorb losses after reinsurance
- If Negative NWP THEN IRIS 2 ratio = 0
IRIS 1 & 2 Considerations
large differences means?
longer tail LOB implications
mostly assumed GWP implications
IRIS 5 implications
pooling arrangemtn implications
- If IRIS ratio 1 and 2 are VERY different than relying too much on reinsurance?
- Longer tail LOB are more volatile → need lower ratios
- If GWP is mostly assumed (insurers have less control over assumed)→ Need lower IRIS ratio 1
- Insurers w/ favorable IRIS ratio 5 (good profit) & adequate reinsurance can have higher IRIS ratio 1
- Pooling arrangements distort IRIS Ratio 1


IRIS Ratio 3
formula
unusual range
unusual means?
other
other
- (Current Year NWP - Prior Year NWP) / Prior Year NWP
- Unusual>=33 or <=33
- Unusual means rapid growth on purpose by relaxing UW to increase cash flow or financial distress
- Unstable year-over-year results may indicate lack of control over business strategy
- Reasonable IRIS ratio 2,5,11-13 can make unusual IRIS ratio 3 okay


IRIS Ratio 4
formula
unusual range
unusual means?
unusual range can be caused by
if unusual then?
- Surplus Aid / PHS Current
- -Surplus Aid = (ceding commission / ceded prem) * (UEPR from non-affiliates)
- -Ceding commission = reinsurance ceded commissions + reinsurance ceded contingent commission
- -Ceded premium = reinsurance prem ceded from affiliates** + reinsurance prem ceded from **NON-affiliates
- -UEPR from non-affiliates=UEP on other US unaffiliated insurers + UEP on mandatory/voluntary pools + UEP on other non-US insurers
- Unusual>=15
- Unusual means relying on surplus aid (ceding commissions) to boost PHS?
- Unusual can be caused by inadequate PHS, too much reinsurance (collectability risk), or high reinsurance commission rate?
- If unusual then subtract surplus aid from PHS in denominator of IRIS ratios 1,2,7,10,13 [PHS (1-Surpus Aid %)]








IRIS Ratio 5
formula
unusual range
unusual means?
unusual range can be caused by
if unusual then?
- 2 yr overall operating Ratio = 2 yr LR + 2 yr expense ratio - 2 yr investment ratio
- 2 yr LR = [2 yr L&LAE incurred + 2 yr policyholder dividends] / 2 yr EP
- 2 yr expense ratio = [2 yr other UW expense - 2 yr other income] / 2 yr NWP
- 2 yr investment ratio = 2 yr InvInc earned / 2 yr EP
- Unusual>=100
- unusual means low profitability caused by high loss ratio or high expense ratio or low investment ratio
* 7. High losses from cats or poor loss development?*
* 8. High expenses caused by commission and brokerage or salaries and operating expenses?*
* 9. Low investment ratio causes by low investment yields (IRIS 6)* - If unusual then look at IRIS 13 (reserve adequacy) or recalc IRIS 5 after removing prior yr development as calculated in IRIS 11


IRIS Ratio 6
formula
unusual range
high unsual means
low unusual means
- Investment yield = Max(0, net investment income earned/ avg cash & invested asset of current & prior yr)
- Denominator = ½ [+ total cash & invested assets (both yrs) + investment income due & accrued (both yrs) - borrowed money (both yrs) - net investment income earned]
- Unusual is >6.5% or <3.0%
- High unusual means high risk instruments or extraordinary dividends
- Low unusual means speculative investments (low income now but high later), high tax exempt bonds, high interest on borrowed $, high investment expenses


IRIS Ratio 7
formula
unsual range
meansures?
cause of high unusual range
cause of low unusual range
- ∆ in surplus / prior surplus
- Unusual is <= negative 10% or >=+50%
- Measures change in financial position (does not account for insurers contributing capital to cover up change to surplus)
- Cause of unusual high value= under-reserve to avoid insolvency, growth, merger
- Cause of unusual low value =cats, losing money (IRIS 5), consider IRIS 4 (surplus aid), consider IRIS 8 (change in surplus notes or captial paid-in or surplus paid-in)


IRIS Ratio 8
formula
unsual range
meansures?
cause of high unusual range
cause of low unusual range
- (∆ in surplus - ∆ in surplus notes - surplus paid in - capital paid in) / prior surplus
- Unusual is <= negative 10% or >=+20%
- Measures change in financial position based on operational results (accounts for insurers contributing capital to cover up change to surplus)
- Cause of unusual high value= underserve to avoid insolvency, growth, merger
- Cause of unusual low value= cats, losing money (IRIS 5)
IRIS Ratio 9
formula
unsusual range
unusual means
other
- Adjusted lib / liquid assets
- Adjusted liab = total liab - deferred agent balances
- Liquid assets = bonds + stocks +cash + receivables + interest due & accrued - investment in parents/subsid/affiliates
- Unusual is >= 100%
- Unusual means low inability to meet short term obligations
- Deferred agent balances are removed bc not liquid
- Bonds include at book/adjusted carrying value
- If unusual then consider prior IRIS 9 trending up?, reserve adequacy, asset values, mix, liquidity
- Skewed up when large deposits w/ reinsured companies? liquid assets down
IRIS Ratio 10
formula
unsusual range
measures
- Gross Agents Balances in course of collection / PHS
- Unusual is >= 40%
- How dependent PHS is to assets that may not be collectible if go insolvent


IRIS Ratio 11
formula
unusual #
unusual means?
- 1 yr development / PHS prior yr
2. Unusual is >= 20%
- Unusual means reserve deficiency on 1 yr development basis









